Bilateral Investment Treaties and Domestic Institutional Reform

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The bilateral investment treaties (“BITs”) signed between developed and developing countries are supposed to increase the flow of investment from the former to the latter. But the evidence indicates that the existing approach of guaranteeing special protections for foreign investors has only a modest impact on luring their dollars. This Article calls for a fundamental redesign of BITs based on empirically validated premises about how host States actually attract foreign investment. Political science and economic studies show that foreign investors place substantial weight on the quality of domestic institutions. Existing BITs fail to promote investment because they are not an adequate substitute for these institutions, nor are they effective in generating reform. The proposed model would make domestic institutional reform the organizing principle of BIT design, and the Article offers several specific provisions that would help achieve that goal.